9911796707
TMI Blog1980 (8) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... the business was set up only in the accounting period which ended on 30th September, 1965. On 26th June, 1961, a technical assistance agreement for sealed units was entered into between Westinghouse Electric International Company and India Refrigeration Industries Ltd., which was apparently the previous name of the assessee-company. The collaborator (hereinafter referred to as " the Westinghouse ") was a division of Westinghouse Electric Corporation incorporated under the laws of the Commonwealth of Pennsylvania, in the United States of America. The said Corporation and a number of its subsidiary companies are referred to in the agreement as " associated companies ". Westinghouse, the technical adviser, was in charge of administering all patents and patent rights belonging to the associated companies in countries outside the U.S.A. and was authorised to grant licences under such patents and patent rights and also to furnish technical, manufacturing and other information of the associated companies. The above agreement which became effective from 21st May, 1962, was prompted by the desire of the assessee, to obtain patent rights, rights under technical manufacturing and other inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the licences granted " shall be non-divisible, non-transferable, non-assignable " (subject to one exception and without the right to grant sub-licences except with the written consent of Westinghouse. With respect to the sale, transfer or consignment of parts the licences were limited to the sale, transfer or consignment of such parts as were used as spares or replacements in connection with the complete apparatus. The article further provided that if at any time the assessee discontinued the manufacture of any particular type or types of licensed material or failed to manufacture the same in reasonable commercial quantities, Westinghouse could, at its discretion, after written notice to the assessee, convert the exclusive licence with respect to such type or types of material into a non-exclusive licence. Article III describes the technical and manufacturing information which Westinghouse was to provide. It states that Westinghouse, in so far as it has the right, shall communicate in duplicate to the assessee upon request the kinds of information set out in the article in relation to licensed material as shall from time to time be in current use by any of the associated comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Article V made it clear that the agreement should not be considered as granting any privilege to the assessee to use in any manner whatsoever the Westinghouse trade mark or any other trade marks belonging to or registered in the name of Westinghouse or the associated companies. All these trade marks were admitted to be the property of the associated companies. The agreement only permitted the assessee to use the term " Licensed by Westinghouse " or its equivalent in connection with the manufacture, use and sale of licensed material in the manner and to the extent from time to time authorised, approved and directed in writing by Westinghouse and even this liberty was to cease on the termination of the agreement. Article VI is important as it provided for the nature of the payments to be made by the assessee to Westinghouse under the agreement. It is unnecessary to set out this article in full. It is sufficient to extract only a portion of this article. It says : " Payments: In consideration of the Licences, option, information, rights and services granted, furnished and rendered, and to be granted, furnished and rendered by the technical adviser hereunder, the licensee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of such termination. It may be observed that under art. VI(a) of the agreement the assessee had to pay $ 50,000 to the collaborators in the manner prescribed in that clause. Accordingly, the assessee paid Westinghouse a sum of Rs. 79,433 on May 21, 1962, Rs. 79,766 on June 21, 1963, and Rs. 79,885 on May 21, 1964. In other words, these payments were made long prior to the commencement of the previous year in which the business of the assessee was set up. For the assessment year 1966-67, the assessee originally submitted return showing a loss of Rs. 8,34,366. In this return the assessee had claimed, as a deduction, 1/ 14th of the amount of Rs. 2,39,084 paid by it to Westinghouse in May, 1962, June, 1963, and May, 1964, respectively. This claim was based on a circular of the Central Board of Direct Taxes dated May 31, 1961, in respect of the write-off of expenditure on technical know-how in the nature of copyrights/patents. However, subsequently, the assessee addressed a letter to the ITO claiming a deduction of the entire sum of Rs. 2,39,084 for the assessment year 1966-67 as revenue expenditure. This claim was said to be based on the decision of the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternative claim of the assessee for the spread-over of the expenditure over a period of 14 years in accordance with the circular of the Board. There were further appeals to the Appellate Tribunal by the assessee. The Tribunal came to the conclusion that the assessee's appeals should be dismissed and the orders of the ITO upheld for both the years as in its view the payments in question constituted expenditure of a capital nature. The Tribunal examined the agreement for technical assistance in the light of the decisions in the cases of CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC), Mysore Kirloskar Ltd. v. CIT [1968] 67 ITR 23 (Mys) and Strick (Inspector of Taxes) v. Regent Oil Co. Ltd. [1965] 57 ITR 716 (CA). It pointed out that the agreement contemplated three types of payments. The first type of payment which was in dispute was the payment of 50,000 dollars, a payment made once and for all as consideration for inducing Westinghouse to enter into the arrangements and for the grant of licence, option information, rights and services. The second payment was in respect of material supplied or training given by Westinghouse. The third class of payment was related to the selling p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section. Having held that the amount was rightly disallowed as capital expenditure the Tribunal also proceeded to express its opinion on the alternative claim of the assessee on the assumption that the expenditure was in the nature of revenue expenditure. On this aspect of the matter, the Tribunal disagreed with the AAC and held that the business of the assessee had been set up only in the accounting year relevant to the assessment year 1966-67, and that the expenditure in question, though incurred prior to the setting up of the business, was, if it were in the nature of revenue expenditure, in the nature of prepaid expenditure which would be considered only in the first assessment of the company for the assessment year 1966-67. Since, however, the Tribunal had taken the view that the expenditure in dispute was of capital nature the question of allowing it on the basis that it was revenue expenditure did not arise either for the assessment year 1966-67 or for the assessment year 1967-68. The assessee's appeals were, therefore, dismissed. At the instance of the assessee, the Tribunal has referred for our decision the following, two questions : " (1) Whether, on the facts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. It also agreed not to assign the benefit of the agreement or grant sub-licences in respect of the patents and trade marks without such consent. It was also agreed that, upon the termination of the agreement for any cause, the assessee would cease to use the patents and trade marks and to return to the Swiss company all copies of information, scientific data or material sent to it and to refrain from communicating any such information, scientific data or material received by it to any person. The agreement was to be in force for a period of 5 years from January 1, 1948, and was liable to cancellation by either party if the other party failed to perform or observe the provisions of the agreement, by giving 3 months' notice. By a subsequent agreement the contribution payable was reduced from 10% to 6% of the net selling price of the pharmaceuticals. The question which arose was, as to whether the contribution other than the part paid as royalties was admissible as an allowance either under cl. (xii) or under cl. (xv) of s. 10(2) of the Indian I.T. Act, 1922. After analysing the provisions of the agreement and disposing of a contention based on s. 10(2)(xii), the court pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 (HL) the fixed lump sum payments received as consideration for imparting manufacturing technique to the licensee was held to be income. Having thus dealt with the decisions relied upon by the revenue, the court observed (p. 701 of 69 ITR): " In the case in hand, it cannot be said that the Swiss company had wholly parted with its Indian business. There was also no attempt to .Part with the technical knowledge absolutely in favour of the assessee. The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss company to the assessee ........ (underlining ours) and proceeded to refer to the six aspects extracted and referred to in the order of the Tribunal in this case. The above observations of the Supreme Court show that the crucial question for consideration in such cases is whether the agreement merely confers on the assessee a right to draw, for the purposes of carrying on its business, upon the technical knowledge of the foreign company for a limited period or whether by virtue of the agreement the foreign company has absolutely parted with or sold its secret processes and technical knowledge to the assessee. If it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired an asset of enduring advantage but where the payment is made only for obtaining access to information which does not become its own, the payments cannot be elevated to the status of payments of a capital nature. Looked at from this point of view, it seems to us that there is no significant or material difference between the agreement in the Ciba's case [1968] 69 ITR 692 (SC) and that in the present case. Under the terms of the present agreement also, the assessee does not acquire absolutely any information or knowledge from Westinghouse. What is it that the assessee gets under the agreement ? Firstly, it gets a licence for manufacturing certain types of apparatus and material and to sell the same. The licence is partly exclusive and partly non-exclusive and even the former can be converted into the latter in certain circumstances. There is no right for granting any sub-licence or for assigning the licence to any other person except with the consent of Westinghouse. The licence which covers the apparatus in Ex. A does not extend to the apparatus and material described in Ex. B even where they are used in the production of or as part of the apparatus listed in Ex. A. As in the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cence was for a fixed period of 5 years while in the present case it is for a period of 10 years in the first instance. The agreement no doubt contemplates that it will continue unless otherwise terminated and enables the agreement being renewed thereafter. But at the same time it also contains provisions for terminating the agreement at the end of the 10 year period as well as at the end of every succeeding 5 years period at the option of the other party and there are also other circumstances set out in arts. XIII and XIV under which the agreement could be terminated. The decided cases (referred to later) show that periods of 10 years and 15 years have not been considered to be so unduly long as to warrant an inference that some lasting advantage is obtained by the assessee as a result of such contracts. The Supreme Court in the Ciba's case [1968] 69 ITR 692 cannot be taken to have indicated that an agreement for a period longer than five years should be construed differently. Moreover, as already pointed out, the conclusion in Ciba at p. 699 was that the assessee was " a mere licensee for a limited period of the technical knowledge " (emphasis added). It will be appreciated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement or, as the Tribunal puts it, to persuade Westinghouse to enter into this agreement, could itself have a different, character. If as a result of an agreement an assessee acquires a capital asset or an enduring advantage then a payment made to obtain that agreement would be capital in nature. On the other hand, if the agreement itself does not confer any permanent or lasting advantage and is merely an agreement which enables the assessee to more efficiently run its business, then it is difficult to see on what principles the nature of the lump sum payment could be said to differ from that of the other payments. We are, therefore, of opinion that there being no controversy regarding the recurring payments made by the assessee, there can equally be no controversy that the sum of $ 50,000 paid under the agreement is payment of revenue nature. One more aspect referred by the Tribunal is that this is an agreement entered into by the assessee-company when it is about to start its business. In our opinion, this fact also does not make any difference. In the Ciba's case [1968] 69 ITR 692 (SC) also, the position was the same and it was held that the payments made under the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1977] 110 ITR 338 (Mad); CIT v. I.A.E.C. (Pumps) Ltd. [1977] 110 ITR 353 (Mad) and CIT v. Indian Oxygen Ltd. [1978] 112 ITR 1025 (Cal). The Gujarat High Court in CIT v. S.L.M. Maneklal Industries Ltd. [1977] 107 ITR 133, at pages 159-162, has also explained the Ciba decision [1968] 69 ITR 692 (SC) and pointed out that it makes no difference whether a stipulated payment is a lump sum or is recurrent. On the contrary, in Mysore Kirloskar Ltd. v. CIT [1968] 67 ITR 23 (Mys), rendered before the decision in the Ciba's case [1968] 69 ITR 692 (SC), the Mysore High Court disallowed certain lump sum payments as capital expenditure. This was on the ground that the know-how was to be utilised for producing new types of machines and also on the 'ground that the know-how was to become the property of the assessee at the end of the period of the agreement. A similar conclusion was arrived at by the Andhra Pradesh High Court in Hylam Ltd. v. CIT [1973] 87 ITR 310 (AP) and by the Madras High Court in Fenner Woodroffe Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad) and Addl. CIT v. Southern Structurals Ltd. [1977] 110 ITR 890 (Mad). Mysore Kirloskar [1968] 67 ITR 23 has, however, been overruled by a ..... 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